Salvini Stoking Italian Risk on Eve of Bavarian Elections

So, let’s talk Germany v. Italy in a no-holds barred, tag-team grudge match for control over the future of the European Union.

Because, make no mistake, that is exactly what is on the table when we analyze what is happening in the EU. Man of Many Hats, Matteo Salvini, is in the driver’s seat pushing the EU hard on Italy’s budget proposal to defy Troika — IMF, ECB and EU — rules on remaining in their debt assistance programs.

The problem, as I’ve pointed out many many times, is that Italy’s debt problem is so big that it cannot be absorbed or contained the same way Greece’s was in 2015 and 2011. Moreover, Salvini’s position is far stronger politically than Silvio Berlusconi’s was in 2012 when he floated the idea of Italy leaving the euro to solve their debt problem.

Salvini’s League is polling well over 30% and its coalition partner Five Star Movement is polling near 30%, so together they have a committed majority of Italians on their side.

As Mike “Mish” Shedlock pointed out earlier in the week, every time Salvini goes up the hill to confront the EU Dragon his popularity rises. And if the EU continues to try and reject the proposed Italian budget it will be thrown back to the Italian people to decide what to do.

Lega Leverage

And this puts Salvini in the position I said he needed to be in last year when The League started to rise in the polls. He and his partner M5S’s Luigi Di Maio have put together a populist budget proposal which satisfies both of their divergent political bases while still skirting the edge of EU budget rules.

As a piece of political kit it is simply brilliant. Because they are both casting Brussels as the bad guy at every turn while sticking to their campaign promises of tax, regulatory cuts (The League) and Universal Basic Income (M5S) and no compromises on Merkel’s immigration program.

And at no point is anyone talking about anything drastic like leaving the euro, even though all of this positioning by Salvini and Di Maio is a stalking horse for exactly that.

The polls are making it clear that Italians love what they are seeing. Italeave is an idea that has to come to the Italian voters of their own accord. Salvini and Di Maio have to cry crocodile tears about being good EU members and trying to reform it from within.

That’s what Salvini’s League of Leagues is all about and his burgeoning alliance with euroskeptics across the continent like Viktor Orban of Hungary, Marine Le Pen in France, Sebastian Kurz in Austria, etc.

With the rise in the polls of Euroskeptic parties across Europe, Salvini and Orban can drive real change in the structure of the parties within the European Parliament. The European People’s Party, which Orban’s Fidesz party is a member of, is vulnerable to losing its senior position in any coalition because of the huge change in Italy’s electoral make-up along with that in Austria with the less radical Sebastian Kurz.

But, the big swing is on the table in Germany. Alternate for Germany (AfD) is now pushing up towards 20% nationally and the next hurdle for its growth is this weekend’s Bavarian state elections. If AfD out polls the Greens and denies the CSU a path to a coalition government without them then that could have spillover effects for Angela Merkel.

AfD has to upside surprise in Bavaria this weekend the ‘shake the pillars of heaven’ as it were and shift the global macro story away from the U.S. mid-terms and back towards the unfolding political crisis in Europe.

Anything over 15% in Bavaria for AfD would be a big deal.

It’s the Debt, Stupid

But let’s not forget that there’s a brewing meltdown occurring in Italian debt markets at this point. The 5-Year note closed this week above the May high on the formation of this EU-hostile government above 3%.

At the same time 5 year CDS spreads for Italian Sovereign Debt is back above 260 basis points. The market is clearly handicapping for this showdown between Brussels and Rome to continue.

That said, I believe part of this is an attempt by the ECB and the banks to scare the Italians into backing down. But, I don’t think it will work. Salvini has seen this show before. He campaigned with Berlusconi after all, the man who was deposed during 2012’s last confrontation with Brussels.

So, don’t think he doesn’t know where all the leverage lies. What he has to worry about is how strong his popular mandate is to got to the mat here and truly put Italy First. And make the successful argument that the only way out of the current mess is to stay in the EU but leave the Euro or force Germany out of it.

And a rising AfD marks a hardening of the German position that they don’t want to bail out profligate Italian dead-beats. The ones caught in the middle of this are the Eurocentric technocrats like Angela Merkel and Jean-Claude Juncker whose job it is to deliver further EU centralization of power to their Davos Crowd masters.

The American Question

Going back across the pond, this week’s market upheaval in the U.S. was a mix of institutional investors hedging against the Democrats regaining the House in November and retail investors getting nervous about tech stock valuations as as we enter earnings season.

I’m sure there’s a bit of anti-Trump help on the part of those same Davos Crowd cronies to push these markets around by the big players to scare ‘the muppets’ and make Trump look bad as we come into the mid-terms as well.

This is the downside to Trump taking so much credit for a stock market rise that he didn’t really have much control over, thanks to the ineptitude of EU leadership.

So, when I look at the landscape of whose political trajectory is rising and whose is falling I note with just a hint of irony that the Real Clear Politics Race for the House is tightening quickly the closer we get to election day.

That Kavanaugh Thing Really Worked Out Well Didn’t It?

Buried in the data is that 30 of the 32 “Toss-Ups” are seats currently held by Republicans. And that base in the wake of the Kavanaugh insanity and the Democrats now openly calling for violence against wrong-think is fully woke.

Strategically, it almost looks to me that they know the polls are garbage, the Republicans will hold serve and so have already shifted their messaging to a post-election opposition strategy.

Why else would CNN allow Don “No Soul” Lemon call Kanye West a “Token Negro” if they thought they could win?